The first step in the financial planning process is identifying life goals. Financial planning is about setting a roadmap to achieve YOUR goals, not the ideal life culture imposes upon you. We are all unique with unique dreams.
If you work with a financial planner their job is not to help you make the right choices but to help you figure out how to make your own choices work within your financial framework. Whether those choices are right or wrong is irrelevant in the client/planner relationship. They will, however, help you prepare for common roadblocks and the unexpected.
There is no right way to live, that's up to you to decide.
Make a list of your dreams
It is difficult to live your dreams if you don’t first know what they are. Make a list of your dreams. Don’t leave anything out even if you don’t think it's possible, even if it sounds crazy. If you don’t ever want to retire, that’s fine. Don’t want to own a home or start a family? That's okay, too. If your dream is to soup up an old VW van and travel the country living off the land, put it on the list.
Once you have a list prioritize it. Decide what you are unwilling to compromise on. Unless you have unlimited funds you will likely have to compromise on some of your goals, so it's important to identify which ones are truly important to you so that you can build a plan that still accomplishes those goals in almost all scenarios.
The financial planning process is focused on goals. Budgeting, insurance, wealth building, retirement, and estate planning are all tools to achieve goals.
Focus on your dreams
Money is a means to an end. Think about success in terms of your goals. Too many people get caught up in what our culture deems successful that we don’t ever figure out what we actually want.
My brother is a 40-year-old bartender. He doesn’t have any wealth, still rents a room in a house, and has no plan for retirement. But he achieved his goal of living his life in his favorite place in the whole world—Lahaina, Maui. Only one of those things really matters to him. I call that successful.
Success should be defined by our own goals. Financial plans should be structured to show what you need to do in order to achieve as many of those goals as possible.
Your list of goals will form the foundation for your financial plan
I like to create financial plans for at least 3 scenarios: Realistic, Optimistic, and Edge of Viability. Always assume the reality will be Edge of Viability but work towards Optimistic and hopefully you will land somewhere in Realistic. Each of these scenarios should be structured around achieving your list of goals.
For example let's say this is your list of goals:
Buy a house in 5 years
Attain financial independence by age 40
Buy a Tesla
Have 3 kids, a dog, 4 cats, and a ferret
Open a restaurant
Get a home theater setup including a 4k OLED TV with Dolby Atmos enabled surround sound
Build a PC
Buy a 1950s Fender P-Bass
Travel the world
Eat street food in Calcutta
Get a seat on SpaceX and see the earth from space
In this example the goals in bold are uncompromisable. The Edge of Viability scenario should accomplish all of these bold goals. The Realistic scenario should include as many as are possible when looking at the entire picture of your finances and current life state. The Optimistic scenario should include all of the goals with a path to achieve each of them. For example, how much money you would need to set aside to take a trip to eat street food in Calcutta, what investment vehicle you would use to build the funds, a timeline, the impact it will have on the rest of your finances and how changes will affect all of the above.
A good financial plan gives you a roadmap to achieve your goals. It gives you the confidence to be you. It’s highly personalized to the lifestyle you want to live. It is a plan on how to have the resources to live how you want. A map to your dreams.
Financial planning is about getting what you want out of life. The first step in the planning process is identifying your dreams. With even a modest income, given enough time, you can achieve almost any goal.